A recent survey by Purbeck Personal Guarantee Insurance has uncovered a significant gap in understanding among small business owners regarding personal guarantees attached to business loans.  

Despite plans to seek new finance this year, many are unaware of what personal guarantees entail. 

The research indicates that out of the 30% of small business owners planning to secure new finance this year, a staggering 60% are either completely oblivious to or uncertain about the concept of a personal guarantee.  

Purbeck said this lack of knowledge could have serious implications for their financial decision-making. 

When informed about the nature of personal guarantees, 24% of respondents mistakenly believed that loans must exceed £10,000 to necessitate a personal guarantee.  

However, there is no such minimum threshold set by lenders, which could lead to unexpected liabilities for the uninformed. 

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Despite the confusion, only 29% of the surveyed directors and owners are in favour of abolishing personal guarantees for small business loans.  

The majority suggests that if personal guarantees are to remain, a clear threshold—potentially between £10,000 and £20,000—should be established. 

The survey comes as the deadline for the Financial Conduct Authority (FCA) to respond to the Federation of Small Businesses’ (FSB) super-complaint approaches.  

Directors of small businesses are often required by lenders to provide personal guarantees as security for a loan. 

The complaint criticises the alleged overuse of personal guarantees by banks when issuing business loans. 

The FSB contends that the absence of a minimum threshold for personal guarantees is inhibiting business growth, effectively acting as a “straitjacket.”  

Purbeck noted that 13% of survey participants decided to withdraw from loan agreements due to the inclusion of a personal guarantee, which can be a significant deterrent for small business owners seeking loans. 

Purbeck Personal Guarantee Insurance MD Todd Davison said: “Business owners must be pragmatic. While it is easy to empathise with the sentiment that personal guarantees should be banned on loans to small businesses, it is understandable that alternative lenders will need some assurance of repayment if the business fails. 

“Fundamentally, small business owners need to understand the risk mitigation strategies they can take before signing a personal guarantee.  These include sharing the guarantee with a co-director, guaranteeing part rather than the whole of the loan, or taking personal guarantee insurance.   

“In fact, in our survey, 46% said they would be more likely to sign a personal guarantee if they had insurance to protect against the risk. Personal guarantees must be proportionate to the loan being advanced and appropriate for each case.”